Selasa, 31 Mei 2011

Regional Coal - Coaltrans Conference: Day 1 - Macquarie

Event· We attended day 1 of the 17th Annual Coaltrans Conference in Bali, which seems to be a well attended conference with more than 1,800 participants. Some of the key highlights include Indonesia's energy policy, impact of the recent forestry moratorium, increasing importance of China trade as a determinant of global seaborne prices, and the prospect of foreign investment in Indonesia (especially low rank coal projects). Details are below.

Impact· Potential for coal upgrading. With regard to Indonesia's energy policy, the government highlights the potential for coal upgrading (similar to what the government was proposing several months ago for upgrading coal before exporting). In our view, this will not be applied in the short-term given the lack of economically feasible and available technology for coal upgrading technology in Indonesia.
· Implication of forest moratorium. The Forestry Minister, Zulkifli Hasan, highlighted that the forest moratorium only applied for the primary forest and pit-land of which majority of current coal mining operations is not included (but could include expansion of mines).
· With regard to borrow use permit application, the Minister was highlighting that it will take around 3-6 months for borrow use permits to be approved as long as there are no overlapping issues (e.g. Logging permit, CPO area) as well as the company has the necessary recommendation from the local governor/Bupati, provincial governor, and environmental checks (each of the process could take approximately 6 months). Further, he reiterated that it is easier for foreign investors to partner with local businesses given their procedural knowhow.
· Increasing importance of China. A presentation from Alex Green (BHP) suggests that given the increasing importance of Chinese import arbitrage (the trigger for increasing Chinese imports in recent years) to determining global seaborne coal prices, a potential exchange or clearing price for the Southeast China index could be developed. Such an index could potentially be based on a combined CFR price for Indonesian, Australian, and Russian coal into Southeast China. Therefore, this would enable for a more transparent coal trade into China as well as enabling the producer to hedge.
· China and India to be the main incremental market for coal. A presentation from Neil Dhar of Noble highlighted that India and China will be the source of incremental demand for seaborne coal. Noble forecasts: (1) China's thermal coal imports to be around 90mt in 2011 (down from 95mt in 2010 due to lack of arbitrage in 1Q11) and growing to 118mt in 2015. (2) India's thermal coal imports to grow from 58mt in 2010 to 67mt in 2011 and 106mt in 2015 driven by the increasing country electrification ratio. (3) Indonesian's exports to grow by 20mt from 264mt in 2010 to 284mt in 2011 as the production growth is partially offset by the increasing domestic demand. (4) Australian exports to grow from 141mt in 2010 to about 146mt in 2011. Further, he also highlighted that Mongolia and Mozambique could be emerging players for both thermal and coking coal trades.
· Strengthening Rupiah squeezing in some of the smaller producers. The presentation from Noble also highlighted that the recent appreciation in Rp has a relatively negative effect on miners' profitability (mainly the smaller producers rather than the big producers given the big producers have mainly US$ exposure). This is because smaller miners typically only engage with domestic contractors (with more tendency to charge a Rp contracting rate).
· Prospect of foreign investment in Indonesian mining with Kalimantan and Sumatra as the main area. Presentation from Bob Kathmandu (Berau and Delmar Mining) suggests some issues and opportunities in Kalimantan and Sumatra:
· Issues in Kalimantan include: Inadequate infrastructure especially in Central Kalimantan, low rank coal is still unexploited (and declining availability of the medium-to-high CV), environmental and social community are issues (e.g. borrow use permit, overlapping issue, and wealth imbalance), lots of unoperating IUP/mining licenses (out of 3000 licenses, only 200 are in operation), lots of unregistered licenses...only 3000 IUP are registered but 8000 were given out.
· Issues in Sumatra include:Inadequate infrastructures (especially coal is inland, i.e. 300km away from the open sea with lack of river transport),
abundant low CV reserves, only 30 companies are operating out of 1000 permits, improper provincial roads (especially South Sumatra and Jambi).
· Opportunities in Sumatra and Kalimantan: Potential investment in coal mines coupled with infrastructure investments (i.e. railways, port, etc), Minemouth power plant, potential for coal blending facility, coal upgrading technology, copper & nickel smelting facility (1t nickel requires 5-7t of coal).

Outlook· The first day in the conference mainly focuses on regulation, the importance of China, and the development of low rank coal projects in Indonesia. The mood in the conference seems to be relatively positive in the medium-term, which is in line with our view. We maintain our preference toward more defensive names in the short term with SAR, Shenhua, and PTBA as our picks while we continue to prefer ASEAN coal names in the medium term (going into 2012) with SAR, HRUM, INDY and PTBA as our key picks given their production growth, price exposure and attractive valuation (trading on 10x 2012E PER).